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Fed Rate Hike

If the Fed holds in 2019, it will be good for the world economy

In the last 3 years since the Fed started hiking rates, it has managed to hike rates by a full 225 basis points. The CME Fed Watch is still ambiguous and is assigning just a 2% probability to another rate hike in the January Fed meet. Of course, these are live numbers and can change. Broadly, the markets appear to believe that the Fed may turn slightly dovish from 2019 onwards. Why would that be so?

Powell has growth worries

In his last public statement, Jerome Powell has hinted at likely brakes on growth due to the impact of the trade war between the US and China. The third quarter growth in GDP in the US and the weak consumer spending are already manifesting that trend. Also, the Fed may not be too keen to throw a wet blanket on the green shoots of recovery by raising the rates. FAANG stocks are already complaining about the effects of a strong dollar, which has led to these stocks losing nearly 25%.

World prefers dovishness

For the global markets in general and India in particular, a more dovish stance with lower target rates will be a good change. Firstly, with the Fed going slow on rate hikes, the RBI will be able to convert its stance into neutral from calibrated tightening. This will not only remove the overhang of rate hikes but also open the doors for rate cuts if called for. Secondly, most emerging market currencies across Asia have lost nearly 40% since the beginning of the year. This has been largely driven by the strength in the US dollar. With the rate hikes ceasing, the EM currencies including the INR will become less vulnerable. Above all, a weaker dollar gives the US the opportunity to give a boost to its exports and that will automatically take care of its massive $650 billion trade deficit. Once that is achieved, the trade war with China should die a natural death. For 2019 a more dovish Fed will be a great boon for global markets, especially the EMs! 

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